Question

Holtzman Clothiers’s stock currently sells for $38.00 a share. It just paid a dividend of $2.00 a share (i.e., D(0) = $2.00). The dividend is expected to grow at a constant rate of 5% a year. What stock price is expected 1 year from now? What is required rate of return?

Answer 1

Answer:

Price in one year is $39.9

Required rate of return is 10.53%

Explanation:

Given:

Selling price of stock (P0) = $38

Dividend (D0) = $2

Growth rate = 5%

Stock price after a year = 38 × (1+0.05)

                                       = $39.9

Stock price expected 1 year from now is $39.9

Using Gordon's constant dividend model to compute required rate of return:

r = $\frac{D1}{P0} +g$

D1 = D0 (1+0.05)

    = 2 × 1.05

    = $2.1

Substitute the values in the above formula:

r =  $\frac{2.1}{38} +0.05$

  = 0.1053 or 10.53%